DEAR HARRY: My stockbroker has been pushing me in the direction of zero-coupon bonds for the past few weeks. He sent me some printed materials on how they work as well as the tax problems they can create. I have pretty much decided to go for a few for my IRA with an almost-decent interest rate. I thought I'd run the idea past you before I take the leap.
WHAT HARRY SAYS: When an individual buys zeroes, the accrued interest gets taxed each year as the value rises to maturity value. This means that you pay the tax before you get the interest. On tax-free zeroes, there's no taxable interest, so you're home free all the way through to maturity. When you put the zeroes into an IRA, the interest does not get reported at all. It does become part of any distribution, however, and gets hit then. If they are purchased for a child, remember that they could be taxed at your rate under the "kiddie-tax" rules. That rate kicks in if your child has total income of more than $1,000 as well as investment income of at least $300. If you buy zeroes at a time of rising interest rates, it is possible to lose money on a sale before maturity. As a result, those who anticipate higher interest rates in the near future steer clear of any bonds except those with short maturities.
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